If More U.S. Airlines Merge, Who would Benefit?

Wall Street is so buoyant about possible mergers among the nation's last six traditional carriers, you'd think airline consolidation was the best thing for the industry since the jet engine replaced the turbo prop.

But an increasing number of analysts are questioning that assumption, and suggesting that all the merger talk may in the end be just that - talk.

"We're in an environment where everyone believes the mantra that consolidation is both necessary and inevitable, but it is neither," says Michael Boyd, president of the Boyd Group, aviation consultants in Evergreen, Colo. "The carriers like American, Northwest, and Continental are making money. Why do they have to merge? We have a very competitive system now."

This latest round of merger talk was sparked by United Airlines' chief executive Glenn Tilton reiterating his stance that "consolidation is good and overdue for the industry" at a shareholder's meeting earlier this week. That prompted a series of still unconfirmed reports that United and Continental Airlines were talking about just such a deal.

Both companies' stock went up more than 5 percent, and it fueled speculation that US Airways' proposed hostile acquisition of Delta Air Lines was gaining momentum. That, in turn, prompted other reports that American Airlines and Northwest were also talking about joining forces - not necessarily because they want to, but because they would have to as a defensive move so they could compete with their potentially merged rivals.

If all the frenzied speculation pans out, the nation would go from six traditional carriers to three. That could put the profitable, but still financially fragile, carriers firmly back in the black, Wall Street analysts crowed.

But an increasing number of airline analysts are raising red flags, noting that federal regulators may not find such a scenario as appealing as the airlines' stockholders and top management teams.

Congressional leaders have also signaled their concern that mergers like a US Airways-Delta one could raise serious antitrust issues. Those two airlines fly similar routes in the South and East, and each owns one of the two shuttles between Boston, New York, and Washington. If a deal were approved, one of the shuttles would have to be sold, say experts. But that wouldn't address other antitrust issues that could drive up prices and reduce consumer choice in a variety of cities.

"If you put US Airways together with Delta, and there's no additional strength there, that's all about reducing competition," says Mr. Boyd. "It's Wall Street wanting to make money that's driving the merger talk."

Advocates of the mergers, like US Airways chief executive Doug Parker, say there is still too much "fragmentation" in the current aviation system, which undermines the airlines' pricing power. That continues to make it difficult for them to fully recover from the past five years' losses, which amount to more than $30 billion. With efficiencies gained from a merged company, Delta and US Airways would be able to further cut costs and reduce capacity by about 10 percent, according to Mr. Parker. Similar moves in the past have already helped his company return to profitability, he says.

"US Airways is the product of several successful mergers, most recently the combination of America West and US Airways," he said last week. "Working together, we have blended employees and cultures to create a new standard in the industry, which combines the best attributes of a low-fare carrier and a full-service airline. We fully expect the 'New Delta' to exceed these already high standards in the marketplace."

US Airways still needs the backing of the Delta creditors' committee to proceed with its takeover plans. Delta's management and most employees are still opposed to a takeover and are determined that the company will emerge from bankruptcy as a stand-alone entity.

United is reportedly watching the US Airways proposal to determine whether the market, Congress, and regulators would also warm to the idea of a United-Continental merger. If the US Airways-Delta merger fails, United is expected to be less likely to move ahead.

Aviation analysts like Kevin Mitchell of the Business Travel Coalition in Radnor, Pa., believe that would be the best scenario. He argues that a flurry of mergers right now would raise prices, overcrowd already-packed planes, and create chaos for customer service for years to come precisely because it is so difficult to merge aviation corporate cultures.

"Of course, Wall Street is going to push it," he says. "What's good for investors, shareholders, and management may not be good for others: Lots of employees will be laid off, and customers can look forward to 20 to 30 percent price hikes and several years of customer-service [misery]."